Published: November 10, 2015
LONDON – The International Energy Agency (IEA) Tuesday warned that an extended period of low oil prices while benefiting consumers could trigger energy-security concerns due a rise in demand but lower investment leading to market imbalance and a rebound in prices.
The continuing low price scenario could heighten “reliance on a small number of low-cost producers, or risk a sharp rebound in price if investment falls short,” stated Paris based IEA in the 2015 edition of its flagship World Energy Outlook publication (WEO-2015).Already, the report finds, the plunge in oil prices has set in motion the forces that lead the market to rebalance, via higher demand and lower growth in supply, although the adjustment mechanism in oil markets is rarely a smooth one.
Under any scenario, major investments are needed in exploration and production, IEA said. The agency projected that an annual average of $630 billion investment is required “just to compensate for declining production at existing fields and to keep future output flat at today’s levels.”
At the current low price level, IEA foresees higher-cost sources of supply being pushed out and thereby, in the emerging scenario dependence on world’s lower-cost producers would increase. In effect, reliance on Middle East oil exports is expected to escalate to a level last seen in the 1970s.In the central scenario of WEO-2015, the energy adviser to the developed world forecasts that the tightening oil balance could lead to a price of around $80 per barrel by 2020.
Alternately, the report also examines the conditions under which prices could stay lower for much longer.
Projecting that world energy demand could grow by nearly one-third between 2013 and 2040 in the central scenario of WEO-2015, the IEA states that this net growth in demand will be driven entirely by developing countries.
The chances of the oil prices lingering at lower levels would depend on the links between global economic growth, energy demand and energy-related emissions weakening.
IEA presents two scenarios: some markets (such as China) undergo structural change in their economies and others reach a saturation point in demand for energy services. All adopt more energy efficient technologies.
But as IEA admits “a prolonged period of lower oil prices could undercut this crucial pillar of the energy transition; diminished incentives and longer payback periods mean that 15 percent of the energy savings are lost in a low oil price scenario.
“Lower prices alone would not have a large impact on the deployment of renewables, but only if policymakers remain steadfast in providing the necessary market rules, policies and subsidies.”
After 2020, the IEA suggested that investments in alternative energy, cuts to oil subsidies and energy efficiency policies could dampen future increases in oil demand.”It would be a grave mistake to index our attention to energy security to changes in the oil price,” said IEA Executive Director Fatih Birol. “Now is not the time to relax. Quite the opposite: a period of low oil prices is the moment to reinforce our capacity to deal with future energy security threats.”
In advance of the critical UN climate summit COP21 in Paris, IEA report sees clear signs that an energy transition is underway: renewables contributed almost half of the world’s new power generation capacity in 2014 and have already become the second-largest source of electricity (after coal).The coverage of mandatory energy efficiency regulation has expanded to more than one-quarter of global energy consumption.
The climate pledges submitted in advance of COP21 are rich in commitments on renewables and energy efficiency, and this is reflected in the WEO-2015 finding that renewables are set to become the leading source of new energy supply from now to 2040.
Renewables-based generation is expected to reach 50 percent in the EU by 2040, around 30 percent in China and Japan, and above 25 percent in the United States and India.
The net result of the changes seen in the WEO-2015 central scenario is that the growth in energy-related emissions slows dramatically, but the emissions trajectory implies a long-term temperature increase of 2.7 degree centigrade by 2100.
A major course correction is still required to achieve the world’s agreed climate goal. “As the largest source of global greenhouse-gas emissions, the energy sector must be at the heart of global action to tackle climate change,” said Dr. Birol.”World leaders meeting in Paris must set a clear direction for the accelerated transformation of the global energy sector.”